What happens to a TIPs ladder in IRA when you die?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
CloseEnough
Posts: 1232
Joined: Sun Feb 14, 2021 7:34 am

What happens to a TIPs ladder in IRA when you die?

Post by CloseEnough »

Curious, if anyone knows the short answer, let's say you are married, set up a TIPs ladder for 25 years in a tIRA and you die half way through. Does the ladder just get inherited by your spouse and work as planned? Or any other issues to be concerned with?
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: What happens to a TIPs ladder in IRA when you die?

Post by JoMoney »

CloseEnough wrote: Mon Oct 23, 2023 7:50 am Curious, if anyone knows the short answer, let's say you are married, set up a TIPs ladder for 25 years in a tIRA and you die half way through. Does the ladder just get inherited by your spouse and work as planned? Or any other issues to be concerned with?
Most financial institutions will allow you to name a 'Transfer On Death' beneficiary for your IRA.
The named beneficiary will get your IRA on your death, the securities you buy inside the IRA don't change that.
The new owner will likely open a new "inherited IRA" account and follow the withdrawal rules associated with that, they can keep the original TIPS you had, and perhaps let them mature as planned (presuming the inherited IRA withdrawal rules don't conflict with withdrawal schedule), or can sell them and buy whatever securities they want.

If the sole beneficiary of the IRA is your spouse, they can treat the IRA as if it was their own, with no special inherited/beneficiary IRA withdrawal rules that apply to non-spouse beneficiaries.

The fact that you had TIPS inside the IRA doesn't change how the account gets inherited, and the beneficiary can change the investments inside the IRA to be whatever they want (or leave them in whatever you had.)

On an unrelated note, I noticed you didn't capitalize the 'S' in TIPS a couple times, the 'S' is part of the acronym 'Treasury Inflation Protected Securities' (TIPS)
Last edited by JoMoney on Mon Oct 23, 2023 8:11 am, edited 2 times in total.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
Watty
Posts: 28661
Joined: Wed Oct 10, 2007 3:55 pm

Re: What happens to a TIPs ladder in IRA when you die?

Post by Watty »

If your spouse or other heir inherits it then they would just get the TIPS and could hold them until they mature or sell them. If they sell them then the price might be higher or lower depending on what the bond market is like then.
CloseEnough wrote: Mon Oct 23, 2023 7:50 am Or any other issues to be concerned with?
You need to make sure that there will be enough other liquid investments in the IRA to pay for RMDs when they get higher. If the interest on the TIPS is not enough to pay the RMD then a TIPS might need to be sold early to take the RMD.
Topic Author
CloseEnough
Posts: 1232
Joined: Sun Feb 14, 2021 7:34 am

Re: What happens to a TIPs ladder in IRA when you die?

Post by CloseEnough »

JoMoney wrote: Mon Oct 23, 2023 8:01 am
On an unrelated note, I noticed you didn't capitalize the 'S' in TIPS a couple times, the 'S' is part of the acronym 'Treasury Inflation Protected Securities' (TIPS)
Thanks for the informative response on my question about TIPS! Including the correction on the acronym. No idea how I migrated to a small "s".
Topic Author
CloseEnough
Posts: 1232
Joined: Sun Feb 14, 2021 7:34 am

Re: What happens to a TIPs ladder in IRA when you die?

Post by CloseEnough »

Watty wrote: Mon Oct 23, 2023 8:07 am
You need to make sure that there will be enough other liquid investments in the IRA to pay for RMDs when they get higher. If the interest on the TIPS is not enough to pay the RMD then a TIPS might need to be sold early to take the RMD.
Good point, I had not thought of it! I would only dedicate 20-25% of the IRA to a TIPS ladder, so should be fine.
cas
Posts: 2227
Joined: Wed Apr 26, 2017 8:41 am

Re: What happens to a TIPs ladder in IRA when you die?

Post by cas »

I've been thinking about this a lot recently. (I am not a lawyer or an accountant, but I was involved in settling an estate recently ... and will be involved in settling other estates in the future ... and will die myself one day and dump my estate settlement on some loved one. While settling the estate, I tried to learn enough to proofread the work of various professionals (e.g., brokerage, estate lawyer, estate accountant). How to put it ... apparently it is hard to get good back office help these days, and proofreading was advisable.)

In a tax advantaged account, it shouldn't be too bad, as far as I can tell. At a high level, things should just proceed uninterrupted under the spouse.

The major administrative complication would be if the overall net worth of the couple is high enough so that is advisable for a "portability only" Form 706 (Estate Tax Return) to be filed to elect portability of the decedent's unused estate tax exemption. (Forum poster bsteiner (estates and trusts attorney) has written recently that his firm files a Form 706 "if there's any reasonable possibility [. . .] that the surviving spouse's estate could be more than $3.5 million." ... i.e. FAR lower than the current estate tax exemption. You can click on that link to see the reasoning.)

Valuing the TIPS for the Form 706 would probably involve calculating the accrued coupon interest on the date of death and adding it to the value of the TIPS principal. I say "probably" because the value shown on a tIRA account brokerage website for a TIPS is probably just for the adjusted principal, and bsteiner says that it is typical for brokerages to neglect the step of calculating and adding in the date-of-death accrued coupon interest if they are asked for the value of the TIPS on the date of death. (Estate attorneys have software that does this.) But from the point of view of a family member wanting to proofread the work of the professionals, it that is something that needs to be proofread.

However ... at least the Form 706 instructions are clear about what exactly needs to be done to value the TIPS and exactly how to report it on the Form 706.

What looks to be a potential big complicated mess (from an estate settlement and tax proofreading point of view) to me is if the TIPS ladder was in a taxable account, where there are a lot of moving taxable parts before and after the death. As far as I can tell, the IRS doesn't think enough people die holding TIPS (or individual marketable bonds in general) in a taxable account for it to be worthwhile putting effort into laying out clear instructions on exactly how to deal with various moving taxable parts when dealing with a marketable bond after the owner's death. (And I suspect the IRS is right ... the vast majority of marketable bonds are held by institutions that aren't capable of dying. As opposed to the (non-marketable) U.S. Savings Bonds, which are primarily held by individuals who *are* capable of dying, and for which the IRS provides very detailed estate settlement instructions.) (Example of somewhat related recent forum discussion: How to calculate "Step Up" basis upon death for Treasury Bill ? ) But you didn't ask about taxable accounts, so I'll leave it there.
Last edited by cas on Mon Oct 23, 2023 9:25 am, edited 1 time in total.
RationalWalk
Posts: 461
Joined: Sun May 07, 2023 12:31 pm

Re: What happens to a TIPs ladder in IRA when you die?

Post by RationalWalk »

All IRA balances must be withdrawn by beneficiaries within 10 years of inheritance, except some beneficiaries are exempted from the 10-year rule. This exemption includes:

A surviving spouse
A disabled or chronically ill person
A child who hasn't reached the age of majority
A person not more than 10 years younger than the IRA account owner

If the line of beneficiaries might eventually include a non-exempted beneficiary, a TIPs ladder would have to be liquidated by that beneficiary within 10 years in order to meet the 10-year rule. It's possible to envision that being the case after a spousal beneficiary passes away.
“Meteorologists” are the MOST accurate predictors of the future -- for the next 3-days...
s.todd
Posts: 7
Joined: Sun Dec 10, 2023 1:07 pm

Re: What happens to a TIPs ladder in IRA when you die?

Post by s.todd »

JoMoney wrote: Mon Oct 23, 2023 8:01 am
Most financial institutions will allow you to name a 'Transfer On Death' beneficiary for your IRA.
The named beneficiary will get your IRA on your death, the securities you buy inside the IRA don't change that.
<snip>
The fact that you had TIPS inside the IRA doesn't change how the account gets inherited, and the beneficiary can change the investments inside the IRA to be whatever they want (or leave them in whatever you had.)

...
Thank you!
bikechuck
Posts: 1454
Joined: Sun Aug 16, 2015 9:22 pm

Re: What happens to a TIPs ladder in IRA when you die?

Post by bikechuck »

RationalWalk wrote: Mon Oct 23, 2023 8:58 am All IRA balances must be withdrawn by beneficiaries within 10 years of inheritance, except some beneficiaries are exempted from the 10-year rule. This exemption includes:

A surviving spouse
A disabled or chronically ill person
A child who hasn't reached the age of majority
A person not more than 10 years younger than the IRA account owner

If the line of beneficiaries might eventually include a non-exempted beneficiary, a TIPs ladder would have to be liquidated by that beneficiary within 10 years in order to meet the 10-year rule. It's possible to envision that being the case after a spousal beneficiary passes away.
Thank you for your post. I am not at all concerned about my wife inheriting the TIPS ladder in my IRA but the issues for my daughters who are secondary beneficiaries are more complex.

They would eventually have to sell some rungs potentially at a loss. Additionally the TIPS rungs themselves would need to be divided and distributed to each of them which I am hoping would not be an issue that would force a sale at the time they inherit them.
rkhusky
Posts: 17353
Joined: Thu Aug 18, 2011 8:09 pm

Re: What happens to a TIPs ladder in IRA when you die?

Post by rkhusky »

bikechuck wrote: Mon Feb 12, 2024 7:46 am Additionally the TIPS rungs themselves would need to be divided and distributed to each of them which I am hoping would not be an issue that would force a sale at the time they inherit them.
I saw a recent email from a brokerage concerning an inherited IRA that was being split between beneficiaries, which indicated that the brokerage was going liquidate all the assets in the IRA and put the net into a money market. Not a problem for stocks, mutual funds or ETF’s, but could have negative effects for individual bonds or CD’s. Perhaps the brokerage could/would just split up the individual bonds/CD’s without selling?

I suppose the issue is the same for other inherited items, like house, property, jewelry, etc, where the decision is to sell and turn into cash so that it can be easily divided, even if it’s not the best time to sell.
User avatar
jeffyscott
Posts: 13367
Joined: Tue Feb 27, 2007 8:12 am

Re: What happens to a TIPs ladder in IRA when you die?

Post by jeffyscott »

RationalWalk wrote: Mon Oct 23, 2023 8:58 am If the line of beneficiaries might eventually include a non-exempted beneficiary, a TIPs ladder would have to be liquidated by that beneficiary within 10 years in order to meet the 10-year rule. It's possible to envision that being the case after a spousal beneficiary passes away.
I think a TIPS could just be transferred in-kind from the IRA to a taxable account. Not that selling a TIPS is generally a big deal, while not as liquid as nominals they are not difficult to sell.

I would be more concerned about selling brokered CDs than TIPS, but again, don't believe one must sell the asset in order to remove it from the IRA, they can just be transferred in-kind.
rkhusky wrote: Mon Feb 12, 2024 8:02 am I saw a recent email from a brokerage concerning an inherited IRA that was being split between beneficiaries, which indicated that the brokerage was going liquidate all the assets in the IRA and put the net into a money market. Not a problem for stocks, mutual funds or ETF’s, but could have negative effects for individual bonds or CD’s.
I think I will ask my brokerage about that, I already had some other beneficiary related questions that I was planning to ask them about. I'd assumed liquidating or not would be up to the heirs and/or the deceased's representative and would like to know if I am mistaken about that. I recently did have the thought that at least for longer term bonds/CDs, I should aim for a number that can be divided evenly among the secondary heirs. I have tended to buy 10 at a time, but 12 may be better as it works for 1, 2, 3, or 4 beneficiaries.

In any case, if the bonds are treasuries and TIPS, I don't think liquidating them is much of an issue, the spreads are pretty small, if the heirs want to re-buy the same or similar. Brokered CDs would be more of a concern but usually have a death put, which could be used if that's better than selling.
rkhusky
Posts: 17353
Joined: Thu Aug 18, 2011 8:09 pm

Re: What happens to a TIPs ladder in IRA when you die?

Post by rkhusky »

jeffyscott wrote: Mon Feb 12, 2024 8:48 am In any case, if the bonds are treasuries and TIPS, I don't think liquidating them is much of an issue, the spreads are pretty small, if the heirs want to re-buy the same or similar. Brokered CDs would be more of a concern but usually have a death put, which could be used if that's better than selling.
The issue with bonds would be if interest rates had changed much since the purchase. If interest rates have dropped significantly, would the heirs want to sell and harvest the gains, but reinvest into a lower-yielding bond. If interest rates have risen significantly, would heirs want to sell at a loss, in order to reinvest at higher rates.
User avatar
jeffyscott
Posts: 13367
Joined: Tue Feb 27, 2007 8:12 am

Re: What happens to a TIPs ladder in IRA when you die?

Post by jeffyscott »

rkhusky wrote: Mon Feb 12, 2024 10:09 am
jeffyscott wrote: Mon Feb 12, 2024 8:48 am In any case, if the bonds are treasuries and TIPS, I don't think liquidating them is much of an issue, the spreads are pretty small, if the heirs want to re-buy the same or similar. Brokered CDs would be more of a concern but usually have a death put, which could be used if that's better than selling.
The issue with bonds would be if interest rates had changed much since the purchase. If interest rates have dropped significantly, would the heirs want to sell and harvest the gains, but reinvest into a lower-yielding bond. If interest rates have risen significantly, would heirs want to sell at a loss, in order to reinvest at higher rates.
This discussion is about an IRA, so there's no tax implications.

Interest rates having changed is not really an issue. The current YTM of whatever was owned is going to be about the same as whatever is bought, if maturities are similar. The only loss would be the bid-ask spread.
Post Reply